Central Bank Rate Expectations
Money markets now price in two European Central Bank rate hikes this year. Last month, no policy moves were expected. On Sunday, French President Emmanuel Macron said freedom of navigation through the Strait of Hormuz must be restored as soon as possible. He also urged Iran’s president to halt attacks against countries in the region, including Lebanon and Iraq. Attention is turning to the ECB’s next policy meeting. President Christine Lagarde is expected to explain how the bank plans to respond to conflict-related inflation pressures. The pair may also face resistance as the Japanese Yen finds support from expectations of possible currency intervention. Finance Minister Satsuki Katayama said the government is monitoring moves closely and is ready to take strong action if needed.Lessons From The 2025 2026 Volatility
We recall the brief optimism in late 2025 when EUR/JPY crossed 182.50, driven by hopes that the conflict with Iran would end quickly. This sentiment was based on the idea that easing energy prices would bolster the Euro. In retrospect, with WTI crude having since spiked to over $110 per barrel that winter, this proved to be a false dawn as the pair fell below 175.00 by January 2026. The market’s pricing of two European Central Bank rate hikes in late 2025 was correct, but traders who bought call options on this news were caught offside. The hikes were a reaction to persistent energy inflation, which ultimately damaged the economy more than the higher rates supported the currency. Recent Eurostat data confirmed the Eurozone entered a technical recession in the second half of 2025, showing the negative impact of those high energy costs. The warnings from Japanese authorities about intervention were not hollow, creating a significant risk for anyone holding long EUR/JPY positions back then. We saw decisive action from the Ministry of Finance in November 2025, which drove the yen sharply higher and caused daily swings of over 300 pips. This highlights why long-dated options, such as straddles that profit from this kind of volatility, would have been a more prudent strategy than a simple directional bet. Create your live VT Markets account and start trading now.
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